Wellington, December 24, 2018
Low interest rates and easing restrictions on home loans may be making property ownership look more attainable for some buyers, but that does not mean mortgages are easy to get.
If you have got your deposit tucked away and you are seriously looking for somewhere to buy, it would be a good idea to start shopping for a mortgage before you need one.
The home-buying process can move fast, and it makes things much easier if you have already got a lender on side.
This is known as ‘Pre-Approval’ and it can take a lot of the uncertainty out of knowing what you can afford.”
First up, a lender will want to know how much deposit you have.
Most lenders expect first home buyers to have at least 20% of the amount they want to borrow. With the average New Zealand house price now at $550,000, you must prove that you have saved $110,000 if you want to buy a property at that price.
They will also ask you how much you earn and how much you spend, along with details about any other debts or loans you might have.
While the bank or financial institution needs to make sure you’re a safe risk, there are two sides to this relationship. It is important that you feel confident about what you are signing up to before you commit.
Your first question – after how much they will let you borrow, and what the interest rate will be – should be about fees: what will you have to pay for taking out this mortgage?
For example, will you have to pay a low equity fee if you have less than 20% deposit? Will there be any penalties if you pay off a chunk of the mortgage early? Can they waive your normal account fees if you take out a mortgage?
Sometimes a lender may want to loan you more than you are comfortable paying out of your weekly income.
The Affordability Issue
Remember that you must be able to afford the repayments and you do not have to borrow up to your highest limits if you don’t want to.
Ask the best way is to structure the mortgage based on your circumstances, and whether this is flexible if things change.
For example, are you better off with a table loan (where you sign up to make regular payments for a set term up to 30 years), or will you be able to pay it off faster if you have a revolving credit loan or offset mortgage?
Also, will you still be able to afford the mortgage payments if the interest rate goes up?
If the property needs a lot of renovation work to become liveable, could an interest-only loan work?
The lender or a mortgage broker should be able to explain all the pros and cons of these different loan types, including how they will affect your payments and the total amount that you will have to pay.
Most lenders will require you to have insurance for a property when taking out a mortgage. You may be encouraged to get this insurance through the lender or sign up to any number of other insurance policies, such as mortgage protection, income protection and life insurance.
Look at these carefully.
Don’t feel pressured to sign up but do think about how you will manage if things change for you in the future.
Life changes don’t respect the terms of a mortgage and you might find yourself wanting or needing to sell the house and buy another one.
Ask the lender if the mortgage (and its terms and conditions) is portable to another property.
Some lenders offer sweeteners to entice people to sign up with them.
Examine the conditions of these deals carefully. Don’t let the short-term ‘carrot’ of a $200 gift voucher blind you to a higher interest rate.
Signing up to a home loan is like entering any long-term partnership.
Do your homework before you commit and you will be a lot better off in the long run.
For independent guidance and information on buying or selling, please visit www.settled.govt.nz
Kevin Lampen-Smith is Chief Executive of the Wellington-based Real Estate Authority.
Images from www.settled.govt.nz